At one time, there were only open-outcry exchanges where traders, or more specifically buyers and sellers, would come together to trade in person. Recently, electronic exchanges have followed suit with the central evolutionary difference being the process of automatic and electronic matching of bids and offers.
In particular, subscribing traders are connected to an exchange's electronic trading platform by way of a communication link and through an application program interface to facilitate real-time electronic messaging between themselves and the exchange. The electronic trading platform includes at least one electronic market, which is at the heart of the trading system for a particular market and handles the matching of bids and offers placed by the subscribing traders for that market. The electronic messaging includes market information that is sent from the electronic market to the traders. Once the traders receive market information, it may be displayed to them on their trading screens. Upon viewing the information, traders take certain actions including the actions of sending buy or sell orders to the electronic market, adjusting existing orders, deleting orders, or otherwise managing orders. Traders may also use software tools on their client devices to automate these and additional actions.
Just as with an open-outcry exchange, an electronic exchange can list any number of markets. Often times, traders will trade simultaneously in more than one market and they may trade simultaneously in markets that are listed at more than one exchange. Ordinarily, each market has its own independent electronic market, and therefore, its own separate stream of market information. Therefore, in these instances, the traders will generally receive more than one stream of market information such that each stream of market information attempts to characterize a given market. In addition to receiving market information from exchanges, traders might subscribe to news feeds such as Bloomberg and Reuters, they might subscribe to real-time quotation vendors that provide information to traders for decision support, and they might subscribe to other news and information sources, all of which are collectively referred to herein as news.
FIG. 1 is provided to illustrate one example of trading in two conventional electronic markets 114, 116. More specifically, FIG. 1 is intended to illustrate some of the kinds of information that a trader may refer to while they trade. To assist in assimilating all of this information, traders often employ automated software tools. However, even the very best software tools at their trading terminals are limited in performance by the networks they communicate over.
In general, FIG. 1 shows two electronic exchanges 100, 102 and connected to the two exchanges is trader's client device 104. Exchanges 100, 102 are electronic exchanges that are hosted at locations that can be geographically near or far from each other. For example, both electronic exchanges 100, 102 could be located in the same city or they could be located in cities separated by continents. In fact, an advantage of an electronic exchange over a conventional open-outcry exchange is that either of the electronic exchanges 100, 102 can exist practically anywhere in the world so long as a high-speed network connection is available to attract subscribing customers. Also, for sake of illustration, the two electronic markets are hosted at two separate electronic exchanges 100, 102, although it is possible for the two electronic markets to be hosted at one electronic exchange. Client device 104 is a trading terminal for use by a trader and it too can be located at any location across the world so long as an electronic connection to electronic exchanges 100, 102 is provided to receive market information 120, 122, respectively. Also, the trader at client device 104 might subscribe to a news service 118. Other subscribing client devices and the various components of the communication link are not shown in FIG. 1 for sake of clarity.
Assume that a buy order or a sell order is sent to a market listed at electronic exchange 100 by path 106. Upon receipt of the order, electronic market 114 designed for that particular market determines if a match exists. More specifically, the electronic market 114 checks the conditions associated with the order, for example order price and quantity, and it compares them with orders resting in its electronic order book. If a match does not exist, the electronic market 114 prioritizes the order with other orders (if any) in the electronic order book of the same price. (Some electronic markets prioritize orders first in the electronic order book and then attempt to match them). Priority may be dependent on the individual specification of the market. Generally, a match exists when the order conditions are satisfied in the market. If a match exists, then a fill confirmation message is commonly sent to client device 104 by path 108, because it was involved in the trade. In addition, all subscribing traders, including those involved in the trade, get some or all of the updated electronic order book information by way of new market information 120.
Upon receiving the fill confirmation message by path 108, the trading software at client device 104 typically updates the trading screen to indicate that the order has been filled. The trader or trading software residing at client device 104 can react by sending an offsetting order to electronic market 116 by path 110, thereby offsetting the position caused by the filling of the first order.
Practically speaking, there are an unlimited number of matching algorithms that can be used by the electronic market to match bids and offers. Mostly, these matching algorithms share common characteristics with well-known matching algorithms sometimes referred to as the price/time priority algorithm and the price/pro-rata algorithm. The price/time priority is that the highest bid and the lowest offer has priority over orders in the same market and the first order at a price has priority over all other orders at the same price. The price/pro-rata priority is that the highest bid and the lowest offer has priority over orders in the same market and all (or most) orders at a price, at a particular point in time, have the same priority. Most, if not all, matching algorithms are focused around timing. In other words, if a trader's order is not at the electronic market, it will not be matched.
Therefore, regardless of the type of matching algorithm used by the electronic market, for the offsetting order to be filled it is often imperative that the offsetting order arrives at the market as soon as possible. That way, if the market price is at the offsetting order price or if the market moves to the offsetting order price, the likelihood of the offsetting order being filled is high. Otherwise, the offsetting order might sit in the market, and as a result, the trader can lose a significant amount of money, especially if the market price moves away from the offsetting order price. For example, according to a certain type of trading referred to as spread trading, if the offsetting order cannot be filled, it results in being “legged up.” A central reason for being “legged up” arises from being late to the market and missing out on an opportunity.
Referring to FIG. 1, take for instance the total time delay incurred from receiving the fill confirmation by path 108, updating the trading screen at client device 104, reacting to the fill, and sending an offsetting order to exchange 102 by path 110. This time delay can result in the trader's offsetting order being late to the market and missing out on an opportunity, therefore being “legged up.” There could also be unknown time delays due to network downtime or slow connection speeds between the exchanges 100 and 102 and client device 104. Moreover, traders located geographically far from the electronic exchange may be at an unfair disadvantage from those traders who are located near the electronic exchange because of their possibly longer network transmission times. A similar total time delay may also be found even if the trader has chosen to offset his orders in different markets listed at the same exchange because the same actions taken will most likely need to occur. In addition, comparable time delays may result when managing existing orders.
While electronic exchanges and markets are insulated at the host, the traders at their client devices assimilate information from multiple markets such as from market information 120,122 and take actions based on this information. Also, many traders at their client devices or on separate output devices receive news 118 on which they base their trading actions. In many instances, like the offsetting order example given above with respect to FIG. 1, spotting an opportunity in the market and capitalizing on it before the market moves or before a competing trader does can separate those traders who are successful from those traders who are not. An important component in capitalizing on an opportunity involves quickly assimilating information and then quickly acting on that information to get your order to the exchange for matching.